Tag: Microeconomics

Currency Crisis Cause and Resolution

Currency Crisis

Currency crises are rapid and unpredictable decline in the value of the currency of a nation. The crises are often more severe if the country involved uses a fixed exchange rate than if the country has a flexible exchange rate since the monetary authority will be forced to abandon the fixed rate. Currency crises usually increase by selling pressure of a currency and can only be remedied through devaluation or establishing a new exchange rate at a sufficiently depreciated level. Several countries have experienced currency crises which are caused by different factors. One of the most severe currency crisis occurred in Mexico between 1994 and 1995. The crises led to huge massive economic crises that forced the Mexican government to seek assistance from the United States and the International Monetary Fund (IMF) (Carbaugh, 2016). The essay herein will, therefore, examine the sources of currency crises in Mexico and the specific resolution and also including some other countries that have experienced currency crisis such as Russia and Turkey.

Mexico Currency Crisis (1994-1995)

Before the 1994 Mexico currency crises, the central bank of Mexico maintained the value of peso within a depreciated band of four percent every year against the U.S. dollar. In 1994, the Central bank decided to issue debt that is linked to the US dollar as a way to reduce interest rates on debts. The debts kept rising until it exceeded the central bank’s falling foreign exchange reserves which led to the currency crises. Despite the government responding by devaluing the currency by 15 percent, the crises continued until 1995. The continued selling pressure on the currency forced the monetary authorities to withdraw support in foreign exchange markets as foreign reserves of the Bank of Mexico fell. Although the severity of the Mexican currency crisis in 1994 was unprecedented, Mexico’s history on exchange rate policy has been characterized by the duration of both fixed exchange rate and flexible exchange rates (Ötker et al., 1995). The devaluation registered by Mexico is the largest depreciation of the currency of a country within one year.

When the currency crises occurred, there was little information about the possibility of its occurrence. The crises were somehow similar to the debt crisis that occurred between 1982 and 1983. Several assessments have been conducted to establish the main cause of the situation, and most of them reveal that it was contributed by the exchange rate policy of Mexican monetary authorities. The other cause identified through the assessment is the excessive use of short maturity tesobonos for deficit financing. Tesobonos is a peso-dominated bond which is issued by the government of Mexico and the coupons associated with it are indexed to the United States dollar. The Mexican government issued the tesobonos as a way to convince the international investors to buy Mexican debt that is exempted from risks associated with currency exchange. The investors are therefore immune to the effects of changes in the dollar value of the peso between the period of purchase and redemption. The risk associated with the change of currency is therefore carried by the Mexican government and not the investors. For instance, if the value of peso depreciated during the period of purchase and redemption, the Mexican government and the taxpayers would be liable for the losses.

According to the international economic statistics that were available before the crises, the Mexican government had the chance to evade the crises if the monetary authorities had information about the actual state of Mexican reserves. At the beginning of 1994, the Mexican reserves were at around $25 billion, but towards the ends of the year, the reserves had reduced to about $5 billion (Tavlas, 1997). The existing reserves were insufficient to meet the existing financial obligations. Furthermore, a default was considered to be a perilous move for the stability of the international financial markets. The deficit, therefore, led to the currency crisis. The International Monetary Fund (IMF) failed to provide the Mexican authorities with information about the decline in the reserves. Following the crisis, the IMF has resolved to closely monitor the financial reserves of developing countries to avert the occurrence of a currency crisis. The IMF has also resorted to providing early warning indicators to avoid the occurrence of a currency crisis in any nation.

Currency Crisis
Currency Crisis

Mexico has a great deal of the forms of direct capital investment in 1994, but it was not sufficient. The government was receiving massive amounts of money through stock-brokers who were motivated by the quick returns which were about 20 percent annually. The investment bankers and the stock-brokers were ready to exit Mexico as soon as the crisis begun thereby increasing the magnitude of economic damage. The troubles of Mexico extended from insufficient reserves, inability to service the debts, and incapability to generate profits on the equity capital. The crises also contributed to other social and political problems such as the Chiaspas rebellion at the beginning of 1994 (Tavlas, 1997). The political issues made the foreign investors take their money out of Mexico thereby broadening the implications of the crisis. The implications of the crises forced the Mexican government to seek assistance from the International Monetary Fund and the United States government.

According to Gil-Diaz (1998), the currency crisis in Mexico was contributed by the execution of the privation of the public enterprises and the deregulation of the Mexican banking sector. He concluded that the confiscation of the banking sector followed by subsequent privatization in 1991-1992 is the cause of the currency crisis. The Mexican monetary authorities made the deregulation of the banking sector without due consideration about the implications that it would have on the federal reserves. The decision later resulted in an increase in unpaid debts to the banks. The currency was then triggered by the Mexican government in 1994 because of the economic decisions. The crisis was determined by the fragility of the banking system and not the macroeconomic factors as indicators by other researchers. Three years before the crisis, the Mexican peso was overvalued which also resulted in economic pressure. The monetary policy that was passed by the Mexican authorities was inappropriate because the Federal Reserve was raising the interest rate while the Bank of Mexico maintained the existing rates. It, therefore, made the investors leave increasing pressure on the reserves.

The Mexican currency crisis had a regional effect through a contagion in various markets such as Brazil, Argentina, Asia, and Thailand; the effect was referred to as the “Tequila effect.” The crisis affected both the stock market and the foreign exchange market. Only the countries that had high economic fundamentals were exempted from the effects of the crisis. The Mexican government responded to the adverse situation by requesting for loans from different countries and international bodies among them being the United States, the International Monetary Fund, and the Bank for International Settlements. In the end, Mexican government managed to secure a loan totaling to $50billion that was used to meet the financial obligations. However, the move by the government to ask for loans received criticism from some of the European authorities that considered the move to be a moral hazard.

The Mexican government continued to resolve the crisis by implementing a severe adjustment program. Some of the strategies in the program included reducing the public spending, increasing the value added tax from 10 percent to 15 percent, and raising the prices of all the public goods and services. The program worsened the situation in Mexico as the Gross Domestic Product dropped by 6.5 percent and inflation increased by 50 percent. Furthermore, the banking system collapsed thereby forcing the government to use public funds in the rescue. The government also changed the exchange rate from fixed to flexible. Later, a law was passed that would only allow the government budget to be approved if the deficit is zero to prevent further lending. The initiative had positive implications in the GDP because of the increased exports of products to the United States. Through the Banking Fund for the Protection of Savings, the government was able to bail out the banking system that had collapsed.  Years later, the government decided to sell the Mexican banks to the international financial groups. Presently, there is only one Mexican bank as foreign investors own the rest.

One of the international institutions that played a role in rescuing Mexico was the International Monetary Fund. The IMF is responsible for providing loans to nations that are in financial deficit. The loans are usually issued following an agreement between the nation and IMF. The IMF responded to the crisis by providing a loan to the Mexican government through the U.S Treasury as a way to protect the foreign banks and other existing financial institutions. The various government also played a vital role in rescuing the currency crisis among them being the United States and Canada. The U.S. has had a long outstanding relationship with Mexico, and it is also the largest trading partner. Although the Federal Service Bank contributed to the crisis by increasing the interest rate, the United States assisted the Mexican government with loans to end the crisis. On the other hand, Canadian government through the North American Framework Agreement (NAFA) contributed funds beyond what had been collected at the time of occurrence of the crisis.

Russia Currency Crisis (1998)

Russia was severely hit by a currency crisis in 1998 that left both the economic and financial system in crisis. According to Gerry & Li (2002), the financial crisis begun in August 1997 when the Russian government defaulted on its domestic financial and economic systems. The duration was characterized by an increase in inflation, high levels of unemployment, and shanking of the economy. Although the crisis lasted for a short period, Russian who was living in the urban areas were severely hit. Globalization and uncontrolled speculation in the financial markets is one of the leading contributors to a currency crisis in the developing countries. The rise in the amount of capital that is flowing in the international financial systems as a result of globalization has had negative impacts on the economies of different countries. The crisis is caused by failures of certain sectors of the economy in the countries involved which later spreads to other countries through contagion and spill-over effects. For instance, the Asian currency crisis spread through contagion and spillovers to other countries such as Thailand in 1997 and later to Russia in 1998. Therefore, Asia is one of the causes of the Russian crisis although research shows that there is a little linkage between the crises that hit the two countries.

The Russian crisis can also be attributed to both political and economic factors. The Russian government triggered the crisis by selling the GKOs and OFZs which denominated debt instruments and coupon bonds after the fall of USSR. The Russian government then started experiencing problems that had negative implications on both the financial and the economic systems. The Russian government responded by converting the Ruble dominated instruments into US dollar-dominated Eurobonds to alleviate the risks involved. The Russian government continued borrowing from external sources that later raised concerns of its default exposure as foreign investors decided to cut their connection with the Russian debt, equity, and commodity market because of lack of confidence. The withdrawal of investors from Russia economy reduced the government capability to finance the debts thereby causing a currency crisis. According to the reports provided by the Economic Intelligence Unit (1998) in 1998, 30 percent of the Russian expenditure was used to service the short-term debts that the government had secured from other governments and international institutions. Therefore, high levels of debts are one of the causes of a currency crisis in Russia.

Russian Currency crisis was also caused nu the fall in the value of the Rule, weak banking system, and the reduction in the level of the foreign reserves. The Russian government tried to remedy the situation through the Central Bank by pegging the Russian Ruble to the US dollar with a narrow band. Several other studies have been conducted to establish the causes of the Russian financial crisis which had serious consequences to the economic and financial systems of other countries such as Turkey, Ukraine, and Moldova. The devaluation of the Russian Ruble also had negative implications on the Russia banks regarding assets and liabilities. There was also a reduction in the foreign exchange contracts because of the increase in the value of liabilities. Furthermore, the Russian government debts such as bonds and treasury bills that were used assets were reduced to worthless assets because of the defaults. As a result, most banks were closed which made a majority of the Russians to lose their savings. Lastly, the crisis caused political fallouts and frequent demonstrations of workers who were demanding a pay rise (Margolin, 2000).

The Russian currency crisis was resolved after intervention by the International Monetary Fund (IMF) which has the mandate of monitoring the economic and development policies enacted by various nations. The other responsibilities of the international body are to lend money to countries that are experiencing financial challenges and provision of technical assistance regarding research and training to countries that are in need. The IMF intervened in the Russian crisis by lending money that would help the government to escape the financial collapse. Despite the IMF lending money to the Russian government, the situation was already out of control since the money could only be used to take care of the short-term debts but not offer a permanent solution to the difficult situation.

For a country to survive a financial crisis, it requires a plan for the aid to be used in a manner that will help escape the situation. It is an excellent idea for the international body to issue financial aid, but the Russian government was not prepared to use the funds to evade the crisis. The government had lost control of the situation, and therefore it required more than financial aid to help the situations. The Russian government responded by coming up with a plan that would ensure the crisis does not happen again. The funds issued by the IMF were used in rescuing the banking system which plays a vital role in maintaining economic growth in a nation.

Conclusion

A currency crisis is one of the challenges that has been experienced by several countries especially the developing countries. Among the countries that have been affected by currency crisis include Mexico between 1994 and 1995, Russia in 1998, and Thailand in 1997. The crisis has severe implications on the economic and financial systems of an economy. The causes of the crisis vary from one nation to another, for instance, the crisis in Mexico was caused by reducing the level of Federal Reserve while excessive borrowing caused the Russian crisis. Once the countries are caught in such difficult situations, it the responsibility of the international bodies and other government to assist in escaping the situation. International Monetary Fund played a vital role in helping the above-discussed countries escape the harsh implication of currency crisis. The United States and Canada through the North American Framework Agreement (NAFA) assisted Mexico financial aid in helping rescue the situation.

References

Carbaugh, R. (2016). International Economics. Boston, MA: Cengage Learning.

Economist Intelligence Unit (1998). Russia: Country Report. London. pp. 42.

Gery, C. J. & Li, C. A. 2002. Vulnerability to welfare change during economic shocks: evidence from the 1998 Russian Crisis. Working Paper. University of Essex, Department of Economics, Discussion Papers.

Gil-Díaz, F. (1998). The Origin of Mexico’s 1994 Financial Crisis. Cato Journal, 17 (3), pp. 303-313.

Margolin, R. (2000). The Russian Financial Crisis: from craze to crash. The Stern Journal, New York University.

Ötker, I., Pazarbaşioğlu, C., International Monetary Fund, & International Monetary Fund. (1995). Speculative attacks and currency crisis: The Mexican experience. Washington, D.C.: International Monetary Fund, Treasurer’s Dept. and Monetary and Exchange Affairs Dept.

Tavlas, G. S. (1997). The Collapse of Exchange Rate Regimes: Causes, Consequences and Policy Responses. Boston, MA: Springer US.

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Did you find any useful knowledge relating to currency crises in this post? What are the key facts that grabbed your attention? Let us know in the comments. Thank you.

Economics Dissertation Topics

Economics Dissertation Topics

Writing an economics dissertation can prove to be a tough task and quality economics dissertation topics are hard to come by. The dissertation in hand allows you to investigate your ability for, and interest in doing economic research. Economics is not the easiest of subjects but it is one of the most interesting. Economics touches nearly every aspect of business and economic theory has been taught for centuries. Economics is seen as the analysis of production, consumption, distribution of wealth and allocation of limited resources to satisfy the needs of people and business. Nowadays, economics extends across national boundaries in the form of international business and global fiscal policy; this is noticeable with the formation of the European Union and flow of international finance.

Your economics dissertation is likely to be the biggest project you undertake at university or college. It can consist of anything between 10,000 to 15,000 words for a typical undergraduate dissertation and will involve in-depth research, time and dedication, you must organize your own time effectively in order to make it a success and set realistic goals. Here we have given a few thoughts and some advice on planning, researching and writing your dissertation. You will see a list of economics dissertation topics further on in this post.

Economics Dissertation Topics
Economics Dissertation Topics

Before you begin your economics dissertation, you must decide on an appropriate economics dissertation topic and title. Your dissertation should focus on a specific issue try to avoid generalizing as you may write a fragmented and disjointed piece of research. The topic should be interesting, something that can uphold in-depth research.

Choosing an economics dissertation topic and getting started

  • What is your topic question?
  • Do you have adequate background research?
  • Stay focused on it

In previous posts, I always stress to keep the research up to date and to engage the reader. There is no real benefit in writing an economics dissertation on outdated theory or defunct policy.

Choose a topic from an area you are familiar and comfortable writing about. Remember that this is a large project that will keep you engaged for most of your final year. It is advisable to revisit topics you have already covered on your degree as this may lead you to elaborate and base your dissertation on a project you have already completed. Writing your economics dissertation will be the ideal opportunity for you to use your intellect, skills, creativity, and economics training.

Economics Dissertation Advice

  • For empirical papers: Where will you get your data? How will it help answer your question?
  • What statistical techniques will you be able to use? Will you be able to identify causation or only correlation?
  • Theory papers typically are not just informal discussions. They tend to involve more mathematics than empirical ones, not less.
  • If you are having trouble understanding a topic, a good place to start is to look in several relevant textbooks to see how they handle it.

Economics is a specialized and scientific subject that involves equations, mathematics, figures and tables, economic theory is often underpinned by statistics and you need to be mindful of this. The field of economics differs vastly from other business subjects such as marketing, strategy and information management. These subject areas tend not to rely heavily on statistics or equations to strengthen findings and recommendations.

Below is a list of economics dissertation topics that will help you

Economics Dissertation – Economic Deflation Concerns in the United Kingdom

Economics Dissertation – Macroeconomic Factors Affecting Exchange Rates

Economics Dissertation – Relationship Between Stock Price And Market Efficiencies

Economics Dissertation – Determinants Of Bank Performance In China

Economics Dissertation – Importance of Economic Integration for Developed Economies

I hope you have benefited from reading this post. Feel free to add comments or suggests that I may have left out. These will be considered and added to this post.

View Economics Dissertation Topics Here

Oil and Gas Sector Qatar

The Impact of the Oil and Gas Sector on the Qatar Economy

Oil and Gas Sector Qatar

Qatar has become a dominant player on a global front, and its economy continues to grow at an alarmingly fast rate; it has seen a large influx of expatriates to the country because of the attractive remuneration packages on offer and the tax free environment that is available to the labor market. In addition the acceleration of growth seen in the Qatari economy is not solely due to the attractive remuneration and tax environment, but a number of other factors exist, such as the presence of large organizations, flexible trade policies, government supported initiatives and influences as well as cross border collaboration with other nations and companies that has intensified the growth of Qatar’s economy.

The production, distribution and sale of oil and gas are one of the fundamental factors that have seen Qatar and its economy develop from a frontier market status to an emerging market status. Petroleum is the cornerstone of Qatar’s economy and accounts for more than 70% of total government revenue. Paramount to this is the volume of gas which places Qatar as the third largest provider of Gas in the world today, and the richest Muslim country globally.

It is commonly becoming a place to build and implement businesses and successful partnerships and furthermore, the wealth Qatar has is in abundance which has enabled the economy of Qatar to flourish under the stewardship and vision of the Qatar emir and its government. Its economic freedom in the 2012 index was rated at 71.3 which places Qatar at 25 in terms of the freest economy of the world, and this shows the strides made by the country as a whole, however this can largely be attributed to the wealth generated from oil and gas productions, which is the largest contributor to the Qatari economy.

While Qatar has made significant progress in laying the institutional groundwork for sustained and diversified economic growth, the volatility of commodity prices, particularly during recent economic woes seen across the world which continues to undermine macroeconomic stability. Restrictions on foreign investment still exist and considerable state involvement in the economy is serious drags on generating more vibrant economic drive.

Justification of the Study

There is a lot of literature on the impacts of oil and gas on the economy of Qatar. However, most of this literature has not taken an all-round examination of the role and impact of oil and gas on the economy of Qatar. An examination of this literature shows a high inclination to the attractive economic effects of oil and gas revenue but they have paid little attention to the negative impacts of over reliance on oil and gas and its role in the current economic climate in the country.

These literature have also paid minimal attention to other factors that have contributed to the economy and the impact of globalisation. Because of this, they have been less reliable on making policy recommendations on economic diversification as a way of responding to volatility of oil prices and the global shift towards green energy supply in order to ensure a continuously high economic growth. The country also has to begin setting up economic projects that will sustain its economy, especially after the exhaustion of its oil and gas reserves. This literature gap provides the rationale for this research. Although it pays a special attention to the oil and gas industry, this research makes a whole round examination of the Qatar economy and out of this, it will make an evaluation of the role of oil and gas companies in improving the economy of Qatar.

Objectives and Nature of the Study

This study will critically evaluate and assess the role and impact of the oil and gas industries within Qatar on its economy. In doing so, the study will focus on current economic climate and analyse the key factors which contribute to the economic growth which has been evident over the last several years. The study will make a strategic evaluation of the Qatari economy examining the benefits and drawbacks of reliance upon oil and gas companies and more importantly looking at the influence of globalization on Qatar’s economy.

Main Aim

To assess the impact of oil and gas sector on the Qatari economy

Literature Review

This section of the paper contains brief summaries of the existing literature surrounding the role and impact of the oil and gas industries within Qatar on its economy and other factors that have facilitated or contributed to this the economic growth of the country.

Economic Landscape of Qatar

Qatar has flourished under the strong stewardship of the Al -Thani family and the support of the government has enabled Qatar to build and strengthen the economy of Qatar. During the recent financial crisis where many countries and governments struggled to maintain control and control spiraling debt Qatar seemed protected from such adversity, and in 2011 Qatar had the highest growth rate. Qatar’s economic policy has been focused on developing its vast oil and natural gas reserves with considerable success. The economy has seen unprecedented growth but this has largely been due to the focus and revenue generated from the oil and gas sector Qatar.

Globalization in Qatar

Globalization has encouraged and seen flexible trade among nations and also allowed emerging economies such as Qatar to prosper as it has enabled various distribution channels to be accessed. Without sufficient access to global channels or investment from foreign investors, the economy of Qatar would remain stagnant with low growth rate and a sufficiently weak economy. According to Mankiw et al (2011), international trade allows economies to achieve economies of scale, build strong relationships and more importantly, develop trade policies and practices which assist the economy.

Qatar, having reduced restrictions to some degree with respect to the investment of foreign investors, has increased its position as a leading oil and gas provider. More importantly, it has allowed Qatar to develop other aspects of its infrastructure away from the production and distribution of oil and gas. Globalization in Qatar can also be seen through the expatriate workforce, who account for almost 75% of the Qatari population, and the skills and knowledge of these individuals has allowed Qatar and its economy to benefit from sharing of best practices and gained knowledge.

Oil and Gas Companies

As mentioned in earlier parts of this chapter, the oil and gas industry in Qatar is by far the largest contributor of revenue, with almost 70% generated through this industry. The money is reinvested within the Qatari economy, with a number of objectives the government has set such as development of the infrastructure in Qatar and the knowledge base. Money is also reinvested to develop and improve other business sectors particularly the reinsurance and asset management sectors. As discussed oil and gas is a large contributor of revenue and is one of the key drivers for the Qatari economy, (Miller et al, 2011) however the volatility of oil prices, and the global focus of shifting towards more greener energy supply is likely to impact the economical standing and strength of Qatar.

Impact of Oil and Gas Industry on Qatari Economy

The exploitation of oil and gas fields in Qatar begun in 1940 and since then, the oil and gas industry has had a huge impact on the economy of Qatar. Generally, the oil and gas industry has led to the attainment of a stable economic prosperity in the country. First, it has removed Qatar out of the ranks of the poorest countries in the world. Before this, it was a poor pearl fishing nation. In relation to this, the industry has also helped to speed the economic development in the country and in 2010, Qatar was experiencing the highest growth rate in the world. This economic boost has mainly been experienced since the dramatic increase in oil and gas revenues in 1973 and the completion of first phase of the North Field gas development. This phase alone cost $1.5-billion.

This positive and accelerated economic growth in Qatar has been recorded even in the times of global financial crisis. During such times, the country experiences a rebounding of its economy due to the increased oil prices as opposed to non-oil producing countries that have to spend extra money to avail oil and gas for driving their economies. The oil and gas industry can therefore be said to provide a shield on the Qatar economy against the effects of global financial crisis. It is undeniable that the oil and gas industry is the backbone of Qatar’s economic development. This industry accounts for over 50% of the country’s GDP, about 85% of export earnings, and 70% total government revenues (Miller et al 2011).

The oil and gas industry has provided Qatar with one of the leading per capita incomes globally. Currently, Qatar has the second largest per-capita income in the world. The per capita income for 2009 was $80,000. This rose to $90,000 in 2010 and to $102,700 in 2011. The GDP for these years were $131.2 billion, $153 billion and $181.7 billion in for years 2009, 2010 and 2011 respectively. Their GDP growth rates were 12%, 16.6% and 18.7 % respectively (CIA world fact book   2012).

The oil and gas industry has also helped to reduce the unemployment rates in Qatar and currently, Qatar is one of the countries with the low unemployment rates. Unemployment rates in 2009 stood at 0.5% and remained constant through 2010. However, this figure dropped to 0.4% in 2011. Inflation rates in Qatar have been reduced mainly because of the increased government revenues from the oil and gas industry and in 2011, this figure was 2.8%. this has led to a decrease in the number of people living below poverty line. The Industries Qatar (IQ) is the second largest producer of chemicals in Middle East. The largest is Saudi Arabia’s Basic Industries Organisations.

The huge revenues from the oil and gas industry have provided sufficient capital for the establishment of heavy industrial projects in Qatar. These include refinery, fertilizer plant for ammonia and urea, petrochemical plant and a steel plant. These projects are based in Umm Said and they benefit directly from gas fuel extracted in the country. The development of industries has provided a means of diversifying the economy. Revenues from oil and gas have been critical in enhancing the development of other economic sectors like tourism, transport, education among others. Through these revenues, the government of Qatar has been able to boost its educational sector and this has reduced the reliance on foreign expatriates who are expensive to maintain.

oil and gas sector Qatar
oil and gas sector Qatar

Overall, the improved government and household income has led to a significant increase in the number of Qataris who attain higher education and those that are foreign-educated. These individuals have occupied the key positions that used to be occupied by the highly paid expatriates. This has had a positive impact in reducing national expenditure. Because of the stable income from oil and gas export, there have been sufficient funds for facilitating the growth of the tourism industry through the funding of the various activities and plans of the Qatar Tourism and Exhibitions Authority (QTEA). This has led to an increase in the number of tourists received in the country and thus revenue from tourism.

The government has also been able to expand the New Doha international airport and this is important in increasing the country’s economic growth by accommodating a larger number of passengers, especially tourists, as well as some economic commodities. Still on transport, revenues from oil and gas have helped to improve regional connectivity between Qatar and, Bahrain and Saudi Arabia through the multibillion-dollar Qatar Bahrain Causeway and the Doha Expressway. This has resulted to increased regional trade between Qatar and these countries. Others include extensive bus and rail transport that are important for facilitating a smooth running of the various economic activities like transport of human resources, raw materials or finished products to the target markets or export points.

Key Factors Driving Economies

An economy comprises of the economic systems of an area; its land resources, capital, manufacturing, production, trade, distribution, consumption patterns and labor. A country’s economy results from the activities and mechanisms that result from its technological know-how, demographic factors, geography, utilization of natural resources and history (Stretton 1999). These factors contribute to the environment, content and principles upon which the given economy operates. A market based economy may be looked at as a limited social network where exchange of goods and services takes place based on the demands and supply between the economic agents i.e. a medium of exchange where credit and debit values are accepted in a given network.  Labor and capital are the only free economic systems that can move free in search of higher profits, interests, dividends, interests, benefits and compensations. Land resource is fixed.

For an economy to be sustainable, the key drivers of its growth include, per-capita income, opens to trade, channelization of investment and deregulation (Stretton 1999). Per capita income or income per person refers to the measure of a population’s resources within a given nation or country in comparison to other nations. It involves taking the sources of income such as gross national income and then dividing it by the total population. Commonly, an international currency is used for calculation of GDP which produces accurate statistics for comparison. It’s not aimed at determining wealth or resource distribution of a nation but a measurement of success (Stretton 1999). Per capita income does not result to monetary income because income over time needs to account for change in prices. Another weakness is that there can be discrepancies on international comparisons caused by differences in living standards between nations that are not reflected on exchange rates.

Demographics refers to information that shows he populations composition on a given area. This information comprises of age, gender, income, race, population growth and migration patterns. These factors determine the price of commodities, demand and supply phases. Changes in demographics can have significant impact on the market trends of a nation. Investors need to analyze the demand and supply effects. Changes in interest rates can influence a person’s ability of purchasing an item since, if the interest rates fall, the mortgages of buying a house for example decreases and increases the demand for the house. When the interest rates rise, the mortgage increases, lowering the demand for the house.

Investment channelization affects the economy in that, if people have invested in buildings, there is sensitivity to economic activities due to the type of lease structure inherent in the business (Stretton 1999). Structures are bound to be demolished any time especially if they are located on public land. On the same note, buildings located on non-strategic business ventures are likely to yield less profits in terms of rent compared to those that are strategically located. People should be advised to invest on appreciating resources such as land as opposed to depreciating resources.

Employment is another key economic determining factor. Employed persons contribute to the economy through tax payment (Stretton 1999). Employment also improves the living standards of people in a given population. Openness to trade is determined by factors such as communication patterns between nations, political stability and history of a nation in terms of trading patterns. Communication strengthens business relations between nations. Political stability ensures freedom of movement and security in conducting trade activities.

The Key Factors Driving the Qatari Economy

EconomyWatch (2010) reports that Qatar is one of the fastest growing economies across the globe and has surpassed countries like Turkmenistan and Singapore according to 2010 economic survey 2010. The survey revealed that by 2010, Qatar’s real domestic product (GDP) growth rate stood at 19.4 percent. Its economic growth has been consistent since 2008 in which it I ranked among the top three world’s fastest growing economies. In fact, economists believe foresee the growth to continue by double-digits in the coming years. The growth is attributed to by many factors among them being producer of oil and natural gasses.

EconomyWatch (2010) argues that the growth in Qatar’s economy has mainly been spurred by the fact that it has abundant oil and natural gas. For instance, it is estimated that natural gas and oil industries contributes 50 percent of the gross domestic product, with 85% of the export earnings and the other 70% being revenue. 2010 statistics show that 76.98 billion cubic meters of natural gas was produced in Qatar which accounts for an average of 1.213 million barrels of oil production daily. Qatar also ranks among the world’s top exporters of oil. This has helped in increasing economic growth based on the fact that there is high demand for oil and constant increase in prices globally.

The other factor that has spurred economic growth in Qatar is the country’s economic diversification efforts (Oxford Business Group 2009 p.42). EconomyWatch (2010) argues that since the economic down turn experienced in Qatar in 1980s and 90s, the government has ensured that the country reduces over-reliance on natural gas and oil for economic growth ensuring that it expands the country’s service sectors such as tourism and finance industries. For instance, Qatar’s financial centre built in 2005 is a state-of-the art business and financial centre that serves major multi-national companies and international financial service organizations. This has contributed a lot to Qatar’s economic growth. With regard to tourism sectors, the country has good infrastructural facilities, ranging from good roads, hotels, and natural sceneries developed to attract tourism has contributes largely to its economic growth. The fact that it has good infrastructural facilities is what led to its successful bid to host 2022 world cup. This has also increased its global profile thus increasing tourist’s influx (Oxford Business Group 2009 p.42-88).

Qatar’s industry sectors are also another factor that has contributed considerably to its economic growth. Apart from gas and oil industries, Qatar also has other industries such as steel, fertilizer and petrochemical industries. The government in partnership with private sectors has maintained a positive growth in all this industries. For instance, Industries Qatar (IQ) ranks second largest chemical producer in the Middle East just behind Basic industry organizations in Saudi Arabia. EconomyWatch 2010 survey reports that Qatar ranked among the world’s fastest growing in terms of industries in 2010, rising by 27.1% in from the preceding year. The trend has continued to grow. Thus it is one of the major factors that contribute a lot to the economic growth in Qatar.

The growth in Qatar’s economy is also attributed to the fact that the country has invested a lot in foreign countries (Oxford Business Group 2009 p.42-88. The money recouped back from such investments is used in the development of the country’s economic stimulus such as education sectors, health and other social facilities. The country also trade a lot with other countries like Japan. This has spurred a lot its economic growth. For instance, EconomyWatch (2010) Japan was the largest export partner of Qatar which accounted for 34.68 percent of all exports from Qatar. This was followed by South Korea, Singapore and India.

The other factor considered to contribute to the growth is the modest population in Qatar. The modest population has ensured that there is no strain in economic resources of the country. This is therefore a factor that has spurred its growth in GDP per capita.

Benefits and Drawbacks on Placing Reliance on Oil and Gas Revenues

Oil and gas are the main sources of revenue to the citizens. National wealth and revenues are mainly derived from oil and gas. As a major contributor to the national economy, oil and gas le ads to growth, development and good governance.  However, oil and gas have brought several challenges to the national government. These challenges do not only include the problems of management of oil and gas resources and the taxation issues. The challenges also include the government’s ability to control resources, governance and accountability in the usage and distribution of the national revenues to all members of the country (Cordesan, 1997).

Another major challenge of relying on oil and gas is the ability to manage the environment.  Unchecked oil and gas exploration and production leads to environmental de gradation. Crucial habitats for both plants and animals can be affected while producing oil. In addition, harmful gas emissions to the environment have led to global warming thus le adding to climate change. Current efforts have been channeled toward the production of energy through renewable sources of energy. Over reliability on gas and oil also reduces the chance of the coming generation in using the resource. With the increasing demand on oil and gas and the mass production, the coming generations  are likely not to benefit from oil and gas  in the coming few years. Investing in the renewable sources of energy is the best alternative to the usage of fossil fuels.  Placing reliance on oil has also led to the decreased food production. Large tracts of land have been used in the exploration and production of oil and gas (Amuzegar, 2001).

Over-reliance in oil revenues leads to increased economic tax reliability. Other contributors to the economic sector have witnesses a decrease in the amount of taxes they can contribute to the national economy. The agricultural sector has not been such effective in contributing to the national economy. However, reliance on oil and gas revenues has led to faster economic growth in Qatar (Cordesan, 1997).

Due to the increasing rate of petroleum rents. The government has been able to decrease the amount of taxes levied on its citizens. Reduced levels of taxes ensure that the citizens enjoy larger part of their income without being highly taxed by the government. However, corruption among government officials has led to the loss of huge amount of national resources. Corruption ensures that citizens do not en joy the potential benefits of the revenues generated from oil (Amuzegar, 2001).

On the contrary, reliance on oil and gas may pose challenges to the government especially when the oil and gas are not in large amounts. Fossil fuels sources can be depleted due to its constant usage and over reliability. The government therefore needs to invest t in other contributors to the economy such as industries. This will ensure that oil and gas shortage commonly witnessed or the eminent depletion of sources lead to a crisis.  Further, there has been lack of public accountability and the rampant corruption cases. This has led to fierce competition in the elective posts with competitors using violent means to deter their opponents from taking office. Politicians have continued to use state resources and facilities; there has also been the increased violation of human rights and harassments (Cordesan, 1997).

Trade barriers and the Impact on the Economy – oil and gas sector Qatar

Internally, Qatar maintains a number of trade barriers, which directly affect foreign investors willing to invest in the country. These barriers are mainly in form of import restrictions. First, the country is extra keen on the import of politically or religiously sensitive items and the Government of Qatar (GOQ) is expected to ban the import of such products.  Just before the 1995 closure of the Arab Boycott of Israel Office which was located in Doha, the government of Qatar unilaterally deleted some giant foreign firms from the blacklist. This included some US corporations. Qatar has lifted the tertiary and secondary aspects of the boycott and the as a result, the Israeli Trade Representation Office was set up in Doha. However, in a brief statement, the government of Qatar announced that this office was officially closed. This was just before the opening of the Organization of Islamic Conference in November, 2000.

Qatar does not have import quotas. However, a number of non-tariff barriers which discourage investment and trade arise occasionally. For example, Qatar maintained a banned the importation of beef from the US from 2005 until mid-2008. International trade in Qatar is also restricted by cultural barriers. For example, the imports of pork products is totally prohibited in Qatar because of cultural reasons. The country is s strong Islamic state and the consumption of pork is totally prohibited by their religious values (Arnous 2011).

International Trade Within Qatar

Imports over the one past decade, Qatar has depended more on imports. These imports range from basic food commodities to consumer goods. Specific import goods include machinery, chemicals, and transport equipment. The Imports of goods is mainly dominated by Organization for Economic Development and Cooperation (OECD) members namely US, UK, Japan, Italy, and Germany. Others include South Korea, Saudi Arabia, France, People’s Republic of China, and the United Arab Emirates. In 2010, the total import value for Qatar was $25.33 billion (CIA World Fact Book). Although Japan overtook the UK as Qatar’s chief machinery supplier, imports from the UK still account for an important percentage of Qatar’s imports. Overall, European Union (EU) is Qatar’s leading import trade partner. The value of Qatar imports doubled since 1990 as a result of improved purchasing power resulting from increased oil and gas sales and this peaked in 1999. Since the early 1990s, the capital gas and oil purchases have accounted for approximately 40% of the total import spending in Qatar (CIA World Fact Book). Unlike the export value, Qatar’s import value is consistent or predicable due to the large difference between its import and export values. Any one time, the country has sufficient money to fund its import trade. Oil and gas has therefore played an important role in maintaining a good import trade in Qatar.

The main export product in Qatar is crude oil. However, its dominance has begun declining over the recent years as a result of the increase in the export of Liquefied natural gas (LNGs). Crude oil accounts for about 56% of Qatar’s total exports and this reliance on crude oil has resulted to inconsistency in Qatar’s export bill (Miller, Agnes, & McBrewster 2010). This value has always fluctuated, to the positive and negative, as dictated by the global oil prices. Evidently, Qatar’s export revenues begun to surge beginning from 1999. in 1998 for example, export revenues were US$4.36 billion but this increased to US$6 billion in 1999 (CIA World Fact Book). Beginning this time, Japan has been the largest export partner, of Qatar. In 1998, exports to Japan alone accounted 58.1% of Qatar’s total export bill. 2010 estimates still places Japan as Qatar’s leading export partner and its trade value accounted for 30.3% of Qatar’s exports. Other important export partners for Qatar include South Korea (13.1%), India (8%), Singapore (7.7%), UK (4.2). Thailand and the US import from Qatar but on minimal levels compared to other export trade partners. Apart from exporting oil and LNG, Qatar also exports petroleum products, steel and fertilizers. In 2010, Qatar’s total export value was $104.3 billion (CIA World Fact Book).  The substantial revenues from oil and gas have allowed Qatar to maintain a significant trade surplus. This has been efficient in shielding the country from trade imbalances.

Research Methodology

Research Approach

Saunders et al. (2007) classify research approach into two main categories; deductive or inductive approaches. This research will use both approaches, as this study will analyse existing study and theories in relation to the subject. The study will rely on secondary data with sources including books, journals, government records, newspapers and reputable websites.  Primary data will also be relied on with questionnaires being issued directly to respondents. Structured interviews will also be conducted with the aim of establishing certain facts in relation to the subject from an authority’s point of view.

Data Collection

In relation to the study, a sample of 20 respondents will be used for the study. A random sample will be drawn from a population of nationals living in the capital city of Qatar. The sample will be drawn randomly at different parts of the city as they go about their businesses. Two respondents will be draw from 10 of the main and busiest streets of the city, one from each end of the street.  The 10th person to pass by the researcher’s standing or sitting position moving toward the other end of the street will be taken as a sample.

Questionnaires will be constructed using pre-defined statements where the respondents will be asked to respond based on their level of agreement with the statement. The questionnaire will be based on the Likert style questionnaire. Specifically, a five-point Likert scale will be used to indicate the degree to which an individual respondent agrees or disagrees with statements. These will range from “strongly disagree’ at one end and at the extreme end, “strongly agree”.

Each participant will be required to complete the questionnaire presented in two languages: Arabic and English. This will help to reduce the effects of language variations and thus increase the reliability of the results. In addition interviews will also be used as an additional method of gathering data. With respect to supporting this study, the people selected for the interviews will be carefully chosen and will be selected based on their position and knowledge of the area of study. For this study, two interviewees will be considered. One interviewee will be a government official working in a ministry or department directly concerned with the harvesting and processing of oil and gas. The second interviewee will be a top official in a privately owned organization that deals with oil and gas. These personalities are chosen owing to the presumed rich knowledge of the gas and oil sector and its impact on the economy.

Data Analysis

Once the data has been collected, it will be coded on SPSS software for analysis. In order to analyze the findings and results of the study, cross tabulation and descriptive statistics will be used to determine the absence or presence, and degree of association of a relationship between any combination/pair of variables that have been selected for analysis. This method will also allow an examination of the frequencies of responses or observations that fall into specific categories. A correlation coefficient will be calculated for the purpose of expressing the relationship that exists between any two variables.

Ethical Considerations

The research does not deal with a subject that is personal and so it is unlikely to attract serious ethical issues. All the same, the research will take into consideration a number of ethical issues in its procedures. Among them is the protection of the private and statutory rights of the participants and the community being surveyed. One of the things that will be done in line with this is obtaining informed consent from the participants to avoid undue intrusion. No personal data of the respondents will be collected, and minors will not be engaged in the survey.

The research questions will be framed in a way that they will help to maintain public confidence in the entire research process. Qatar is a society that highly regards its cultural values such as human relations. Because of this, the participants, especially female participants, will be approached in a more sensitive manner to avoid suspicion, misunderstanding, or undue concerns. Any conflicting interest will also be identified and taken note of.

References

Amuzegar, J (2001) Managing the Oil Wealth: Opec’s Windfalls and pitfalls, New York, I.B Tauris.

CIA world fact book (2010) Qatar Economy 2012

Cordesan, A. (1997) Bahrain, Oman, Qatar, and the UAE: Challenges of security. New York Westview press

Crystal, J. 1995. Oil and politics in the gulf: the merchants of Kuwait and Qatar, (1st Ed), Cambridge University Press. Cambridge.

Economist Intelligence Unit (2006) Qatar. Country Report, June 2006. Economist Intelligence Unit, London, UK.

EconomyWatch (2010) Qatar Economy

Government of Qatar, Planning Council (2006) Qatar 2025 Vision, Qatar, Government of Qatar

Mankiw, G. & Taylor, P. (2011) Economics, (2nd Ed), Nelson Education.

Miller, P., Agnes. F. & McBrewster, J (2010) Qatar: History of Qatar, Politics of Qatar, Municipalities of Qatar, Economy of Qatar, Geography of Qatar, (1st Ed), Alphascript Publishing.

Oxford Business Group (2009) The Report: Qatar 2009, Oxford, Oxford University Press.

Qatar Knowledge Economy Project (2007) Qatar Knowledge Economy Project

Saunders, M., Lewis, P and Thornhill, A. (2007) Research Methods for Business Students, (4th Ed). Prentice Hall, London.

Stretton H. (1999) Economics: A New Introduction, Pluto Press.

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